Will the Economy Recover?

The politicians, especially those who are left of center, tell us they are “following the science” as they try to micromanage our lives. Horsebleep! They are selectively listening to epidemiologists who are engaged in a daily voyage of discovery about the virus and far from definitive answers. Do you remember the ventilator shortage panic?

In the process, the science of economics and basic common sense have been ignored. California closed golf courses but left liquor stores and pot shops open. Who is more likely to engage in risky behavior — someone who just played 18 holes of golf or someone who had several high powered joints or five or six pops? The Governor of Michigan closed garden departments and sent the landscapers home. Did she think the plants were asymptomatic carriers? Was she worried about group gardening indoors?

It is possible that a high savings rate, pent up demand and another round of stimulus will get the economy back on track, but I have my doubts. Hundreds of thousands of businesses have shut down, never to reopen. Hundreds of thousands of businesses have taken on debt to keep the doors open. It will take years to pay off that debt, inhibiting productivity enhancing investment and business expansion. The federal government will have taken on at least $4 trillion of additional debt. Even though the Fed has stepped on interest rates with both heavy boots (thereby stealing from those fools who have some savings), servicing the new debt will cost upwards of $100 billion a year. That means fewer services and higher taxes. Neither of those will contribute to economic growth.

I’ll leave you with an example of misguided public policy that will create unwanted long term consequences. That would be eviction moratoriums. The rationale was simple. Government action threw people out of work. As a result, they couldn’t pay their rent. So, the government (instead of sending them rent money) decided that property owners could pay the bill. That solution reflects utter ignorance of the economics of rental property.

Let’s look at the distribution of the average rent dollar. About 40 cents goes to pay property tax, insurance and operating expenses. There were no moratoriums on those expenses. Most of the remaining 60 cents goes to debt service. I have yet to see a mortgage moratorium. Real estate is a capital intensive business. Developers of apartments aren’t billionaires who build out of petty cash; they are entrepreneurs trying to make a living. They borrow about 75% of the cost of building or buying apartments and get the rest of the money from secondary lenders or investors. The whole system is based on anticipated rent collection. When rent stops, things come unglued. We are in for years of evictions, defaults, foreclosures and restructures.

California has a huge housing shortage. Politicians lament the disproportionate impact of COVID on minority communities. The virus isn’t a racist. It attacks those in close proximity indoors. That proximity is directly caused by the astronomical cost of housing in California, which is directly caused by government policy. And now the problem is exacerbated by more government policy. Eviction moratoriums, which are now scheduled to last 13 months, and could be extended, are going to make the problem much worse. Who will want to build or finance apartment construction when rent payment has become optional?

The economic cost of misguided public policy could be with us for quite some time.

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